The Tax Club Report

If I pay all of my grandson’s expenses, can I really save money by claiming him as a dependent? If I have three kids, how many exemptions can I claim? These are questions that every taxpayer should know the answers too. In order to fully take advantage of all tax loopholes available to you, we must first understand certain important items about this often overlooked credit.

Before we go into further details about who qualifies as a dependent, we will first visit the topic of exemptions and how one can save money on taxes from personal and dependency exemptions.  The use of exemptions in the tax system is based in part on the idea that a taxpayer with a small amount of income should be exempt from income taxation. An exemption frees a specified amount of income from tax, decreasing your tax liability (the amount we must pay in tax).  For tax years 2009 and 2010, you are allowed to take an exemption in the amount of $3,650 for you, the taxpayer, your spouse and or your dependents. These deductions are called dependency exemptions and you are allowed to deduct them for each person that you maintain and take care of, also known as your dependents. 

So how do you know if your grandmother is your dependent? How do you know if your girlfriend is your dependent? How do you know if your child who is in college and making some money from his job at the mall is still your dependent? In order for you to classify a person as your dependent, there are certain requirements that should be met. There are two types of dependents, a “qualifying child,” which is exactly what it sounds like and a “qualifying relative,” which is a somewhat misleading name to describe this type of dependents as you will find out as you continue to read this article. 

Qualifying Child

• In order for your child to qualify as a dependent, we must first establish that this child should be under the age of 19 or under the age of 24, in the case of a student.
• This child must be a son, daughter, adopted child, stepchild, eligible foster child, brother, sister, half brother, half sister, or a descendant.
• The child must live with you for more than half of the year.
• And this child must receive more than half of his support from you, the taxpayer. For students, the amount paid for school is considered support.  

If these requirements are met, the child is considered your dependent and you can claim the dependency exemption on your tax return. Now what about those people who live with you but are not related to you at all? In the midst of this turmoil that our economy is in, can you claim your boyfriend as a dependent if he loses his job and is unemployed for the whole year? The answer is yes. Although he is not a relative, he can still be claimed as a dependent, which is why the “qualifying relative” is a misleading name to describe this type of dependency. 

A “qualifying relative” is anyone who:

Is a relative – parents, grandparents, step-parents, uncles, aunts, in laws, or some one who is not related but lived with you the entire year.

• They must not have a gross income of more than $3,650, or the exemption amount.
• They must receive over one-half of their support from you. Support includes food, shelter, clothing, medicines and so on. 

If they are members of your household, did not make more than $3,650 and you provided for their support, they could qualify as your dependent regardless of their relationship to you. 

Of course, it goes without saying that in order for a person to qualify as a dependent, he or she must be a US citizen and have lived on US soil for at least part of the year. 

Now it is important to note that these tax exemptions are not available to all tax payers.  If you make too much money, your exemptions will decrease as you make more income. This means that if:

You are married and you make over $250,200, your exemptions will be reduced until you hit $372,700, which then completely erases the exemption.

• If you are head of household, your phase out starts at $208,500 and is completely wiped out at $331,000.
• If you are single, your phase out starts at $166,800 and ends at $289,300.
• For married couples filing separate returns, phase out starts at $125,000 and ends at $186,350. 

We here at the Tax Club are committed to assisting you with any or all of your tax issues. Please contact us for a free tax consultation at (866)840-1829.

Tags: Dependants, Tax Exemptions, Taxes

This entry was posted on Monday, January 25th, 2010 at 11:00 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.